Friday, May 4, 2012

The April gain in employment was less than expected, but with substantial upward revisions to prior months, net employment gains were actually slightly higher than expected. So there's no reason the news should be viewed as negative or disappointing. In fact, when you dig into the numbers and include the household survey in your dataset, the news continues to be mildly encouraging. The chart above focuses on gains in private sector employment, and what stands out is that the household survey continues to pick up more jobs than the establishment survey. This is fairly typical in the early years of a recovery, since the household survey is better at finding new startup companies and people who have gone to work for themselves. The establishment survey only surveys companies that have been in existence for awhile. According to the household survey, things have really improved over the past year.

According to the household survey, the private sector has added about 5 million jobs since the low in employment at the end of 2009; that works out to an annualized gain of 1.9%. But over the past year, the household survey shows a gain of 3 million jobs, which is a gain of 2.5%. The chart above shows the 6-mo. annualized gain in private sector jobs according to each survey, and here we see how the pace of jobs growth has picked up of late, especially in the household survey. If you just split the difference between the two, private sector jobs growth now equals or exceeds the best years of the prior business cycle (which doesn't say all that much, since it wasn't a very robust growth cycle). Jobs growth is going to have to pick up a lot more, of course, before the economy can begin to get back on track, but at least we continue to make progress towards that goal.

As an aside, here's an updated version of the chart from yesterday's post. With the upward revisions to the BLS numbers released today, it now looks like ADP's jobs number has been pretty close to the BLS. In fact, ADP has consistently underestimated private sector jobs growth, but not by much: year to date, the ADP total is +730K, while the BLS reports 827K., for a monthly difference of only 24K. That's a mere rounding error for this data. Same goes for the past year, with ADP reporting +1.85 million, and the BLS +2.03 million, for a monthly difference of only 16K.

Other than the fact that this recovery has been fairly tepid given the depths of the prior recession, this recovery stands out as being the first during which public sector jobs have taken a serious hit. This is painful for those involved, of course, but it is very encouraging from a macro perspective, because the public sector has enjoyed disproportionate gains over the past decade. As the chart above shows, the private sector has experienced only a very small gain since early 2000, while the public sector, after losing about 700K workers since the 2009 peak, is still 7% larger than it was at the beginning of 2000. If our fiscal house is going to be put in order, the public sector is going to have to slim down even more in the years to come. And that is especially true for compensation (including pension benefits), since numerous surveys now show that public sector employees enjoy substantially higher pay than their private sector counterparts.

Overall, I'd say that the news today was mildly encouraging. So far, however, the market seems to be disagreeing with me, with stocks down and bond yields down. But with the economic fundamentals continuing to improve, albeit only modestly, the market should eventually reconsider and reverse today's action.

61 comments:

I agree that the household survey is better and that over the past year, it has shown more strength than the establishment survey. I put more trust in the Household survey as it better reflects small business. My concern is that the seasonally adjusted household survey has shown a drop in total employment for the past two months:

February: 142,065,000March: 142,034,000April: 141,865,000

While this is not a big drop, it is heading in the wrong direction and may be an artifact of the seasonal adjustments after a warm February.

The good news is that I had been concerned about a drop in profits for the Dow 30 in 1Q12 after a drop in 4Q11. While there are still a few companies to report, ttm EPS is up slightly for the companies hat have already reported.

The household survey can be very volatile from month to month, so you have to be careful when drawing conclusions from it. I think the declines in the total number in recent months are in a sense payback for the gigantic increases in previous months.

Abstracting from the monthly volatility and the recent declines in the total, the private sector continues to grow and the public sector continues to shrink. Those are both healthy trends.

Hi Scott: I love your blog but am really confused by your interpretation of the Household Survey. It appears to me that we lost jobs in the Household Survey. Would you consider giving a primer of how to read that Survey in a future blog as I am obviously confused?

Ben-All the data that Dr. Perry and others point to to indicate a lack of inflation, are inconsistent with what I experience in reality. My food costs, transportation costs, taxes, fees, household maintenance costs, and business costs are ALL going UP at astonishing rates. I want to know what actual items are not inflating. There are almost none in my view, except maybe consumer electronics.

I have 7 markers which are a combination of various mathematicalcalculations....they are taken from the establishment survey,household survey and the non seasonally adjusted jobless claims...only 1 isflashing negative...

Of course, no consumer or business has the exact same rate as reported by any price survey.

If you are a younger person buying a house today, especially in the Midwest, you are enjoying the lowest cost housing ever. If you are driving a fuel efficient car, and eating at home, your living costs are well under control.

If you are an older person, you probably find health insurance is a killer and getting worse every year, and your home or rents are not getting cheaper. Your larger car is eating gas.

Unit labor costs for businesses have been falling. Commercial rents of all kinds are very soft. Businesses are not facing inflation.

Richard: re the Household Survey. The total # of nonagricultural jobs fell by 235K in April, but public sector jobs fell by even more (-442K), so that means private sector jobs rose by 207K. You can see the data here:

Squire: the problem (from my supply side perspective is never "not enough aggregate demand." Demand is not what drives the economy. Supply (work, investment, risk-taking, production, innovation) is what delivers growth. Supply creates its own demand. We have a problem on the supply side of the economy. Probably because people worry that taxes and regulatory burdens will rise, among other worries. We need to shrink the public sector, broaden the tax base, and reduces marginal tax rates, especially on business.

Re the parallels between US and Japan in re monetary policy. Japan has had demonstrably tight monetary policy for decades. The proof of this can be found in 1) the fact that Japan's consumer prices have not increased at all in the past 18 years, and 2) the yen has risen against every currency in the world.

US monetary policy is not tight because 1) all measures of inflation continue to rise, and 2) the dollar has been quite weak against most major currencies for the past 10 years.

If US monetary policy were too tight, we should be seeing a stronger dollar, higher swap spreads (because very tight monetary policy increases default risk), a much flatter or inverted yield curve, very low or negative inflation expectations (e.g., TIPS spreads), and very low or negative inflation. Yet we see none of these classic indicators of overly tight monetary policy. With money growth high by most measures, with the dollar very near its all-time lows, with 5-yr 5-yr forward inflation expectations at 2.7%, with 10-yr TIPS spreads at 2.2%, and with the 10-30 spread at historically steep levels, I see numerous reasons to conclude that the problem with the US economy has nothing to do with money being in scarce supply.

Benjamin: you are a broken record on this, and it would be nice if you came up with facts to back up your assertions that the Fed is starving the economy with tight money.

Benjamin, I tend to empathize with your views, however the opportunity to create wealth is not likely to be monetary expansion/inflation driven in the coming years -- and yes, tight monetary policies will make it impossible for government to continue deficit spending, which means that government spending may have to be cut by upwards of 40% in order for austerity to achieve its goals -- enforcement of austerity in the US may have to occur at gunpoint in some regions and localities -- nevertheless, recent events around the world have convinced me to abandon hopes for monetary expansion and to instead, invest into the austerity environment for current earnings -- my plan is working by the way -- big picture, inflation will return down the road, it always does -- in the meantime, the first US stop of the global austerity rampage will be in California later this year and next...

China has just eclipsed the USA as the largest market for BMWs (cars).

A bullish monetary policy works, as evidenced by China.

Japan and Europe are nearly imploding---tight money, is the reason.

It may not be what theory tells us, but the empirical results are what they are.

BMW sales peak fuelled by Chinese demand.By Chris Bryant in Frankfurt

Sales of German-made premium vehicles set new records during the first quarter, defying weakness in the broader European car market and fears of a slowdown in fast-growing China.BMW said it had sold more vehicles in March than in any month in its history, as strong Chinese sales, new models and demand for sports utility vehicles steered it to one of its best quarters yet.More

BMW’s Chinese sales increased by 37 per cent during that time, while Mercedes-Benz brand sales in China rose by 20 per cent.

As a result China overtook the US as BMW’s largest single market in the first quarter, mirroring the experience of Audi which saw China become its largest single market last year.

Hi Benjamin, I regret that the Federal Reserve is prepared to enforce the Main Street drought of capital at gunpoint (assuming the the Federal government continues to go along with austerity measures in the future) -- once the riots begin (as in Europe), the government will have no choice but to enforce law and order -- keep your eyes on California -- austerity in the US begins in California -- US austerity without California's lead is meaningless -- the indicators to watch for will be double digit percentage cuts in California state spending and/or double digit percentage increases in taxes -- austerity must be forced upon California for tight monetary policies to work -- looking forward, I would invest into the austerity trek -- as I said above, the global austerity rampage will hit California later this year or next -- thank you for the opportunity to comment.

In truth, these were tough years for the US economy (I graduated from high school in 1973 and "lived" through these years and have first hand experiences with inflation that still trouble me) -- nevertheless, inflation did have some positive side effects that accompanied the negative -- still, the 1970's were difficult times, and the US was still "licking its wounds" from the Vietnam debacle and civil rights movement, which including episodes of serious political instability in cities and on college campuses across the US -- said another way, Washington feared political instability in the 1970's and chose to throw money at the problem.

Today, Washington does not yet fear political instability and economic scholasticism is now ruling the political stage -- once the riots begin however, society may force "real politik" back into Washington -- in the meantime, the central bankers have won the day and economic austerity measures are expanding across the southern flank of Europe, and will soon hit the US west coast -- how austerity will unfold in the US is still unknown -- however, watch for governors to call out their National Guards to enforce law and order in cities and on college campuses.

The arguments in favor of monetary expansion are irrelevant at this point -- the Main Street economic austerity is only just beginning in the US -- those without means should take cover...

Those numbers are amazing. We certainly could do with some real growth quarters like that.

Yes, I would tolerate higher rates of inflation to get there---though much as changed from the 1970s (but not some economists who still think we are in the 1970s).

We get much more growth per inflation unit than back then.

1. The US domestic labor has deunionized.2. International trade has made for global markets in services, goods, and capital.3. The Internet wipes out a lot of pricing power that existed pre-Internet. 4. We use much less of our capacity than back then.

When the Chicken Inflation Littles belatedly recognize just how uninflation-prone we are---well, they never will. Sanctimonius sermonettes about inflation are deep in the DNA of some gold-nut types.

And yes, the 1970s had terrific music, and the ugliest cars ever made. And fortran computer cards.Yes, I had bell-bottom pants and a globe of hair on top of my head. I drove a flammable Ford Pinto. And even by the standards of the era, I managed to be a bad dresser. I think I had one tie that approached six inches in width.

Why is it that most economists ignore the revisions each month? By the time the April report gets revised, the actual private sector jobs sill be in the 175K range or some 50% higher than originally reported.

For whatever reason, the market consistently sees the jobs report as weaker than reality b/c those revisions get ignored. Heck, the jobless claims report on Thu should've ruled the markets and much more than a backwards looking jobs report.

If what the lefties and righties in the USA say now is true—that the Fed cannot sustain growth and inflation, even through QE—then I say ‘Great!”

Then the Fed has license to buy Treasuries by the hundreds of billions of dollars, or even a few trillion.

We will deleverage the USA for our children.

And there will be no downside—perhaps no more growth than otherwise, but no more inflation either.

So, a steady program of $100 billion month in QE, mainly Treasury buying, is a win-win. Either it works, and we get a robust recovery, or it doesn’t, and we deleverage the USA.

Of course, QE has to work, or we might as well say we have no idea how people and economics work. If the Fed every month buys $100 billion of Treasuries, the sellers will either have to buy other assets, or spend the money. So equities or property will go up (good) or spending (good). And government debt will go down (good).

The worst case scenario is not a sustainable scenario: That “loose money” will boost commodities prices. This may in fact happen—but only for a while. Unlike equities or property, there are live functioning commercial markets for commodities. If oil goes up, demand goes down. New alternatives and supplies come to market—especially if we have a growing economy, and there is money to invest, and profits to be found.

There is a huge self-contradition, btw, of many in the tight-money crowd. They say oil pieces cannot be manipulated, or go too high on the basis of speculation. Okay, good.

Then they say that sustained QE will cause oil prices to go up? How? Demand will not be that much greater. Supply will be the same.

In short they are saying speculation cannot push oil prices, unless speculators think loose money will pour into oil futures. So then we have to say speculators can boost oil prices.

Hi Hans, I wish what you say were true -- I have little faith any either Democrats or Republicans -- honestly, neither does most of the nation at this point -- the party system is a legacy from the past, and the party system is not working today -- far from it -- I hope you are right, and that the Republicans bring some solution to the table after they return to power -- however, that's too much of a risk for my portfolio -- I plan to make money no matter who is in power...

PS: I have been watching US presidents first hand now for over 60 years -- none of the presidents over that period ever did much for me -- everything I've earned in my life has been despite the political system, not because of it -- by the way, I have lived half of my adult life overseas, and the situation is the same outside the US -- the world is a dangerous place, and we should all keep that thought front of mind...

The Fed will ease up, and maybe we will see marginal traction on the federal deficit (unless Romney gets us into another war).

I did not expect Bush Jr. to get us into not one but two very long and expensive wars. He ridiculed "nation building" when first elected. Except for $4 trillion worth, I guess. Medicare Part B is more expensive the the entire Social Security program.

Bush jr., who favored military uniforms, also started the practice (embraced by Obama) of assassinating US citizens without trial or even detention. No wonder the Argentines say they think we are turning into another Banana Republic.

So now comes Romney....

PS Yes, conservative bloggers talk about cutting the budget---though they do not really know where to cut. Our rural economy is flooded with federal subsidies, and below is a list of the largest federal agencies, by employment.

Friday’s employment report was in fact on the side of poor. The key weakness was the decline in the labor force participation rate. As workers drop out there is less disposable income, that is, less aggregate demand. The payroll employment gain of 115K was poor as well. If labor force participation were not dropping so precipitously on trend, 115K new jobs each month would not be enough to keep up with population-driven labor force growth. In other words, the unemployment rate would be rising. Another weakness was the poor wage print, hourly earnings of non-supervisory personnel up only 3 cents. Wage gains are only a smidgen off their historic all-time low of 1.4% year over year set a few months ago. Another crucial aspect of weak aggregate demand.

As for the ADP report, the average miss over a given time period more than a few months is not what’s important for many purposes. It’s the absolute value of the monthly misses. If a number is big enough to move the bond market, it is important. The 6-month average absolute error of the unrevised date (the first prints) is 59K at present. Marginally enough to move the bond market. But as recently as October 2010 and for months before that, it was 162K and larger. Misses like this rock the market when the BLS releases the new month’s data.

As for revisions to the data, these are not really problematic in the big picture. The most useful aspect of the monthly revisions is in comparing the latest monthly gain with revisions and net of revisions. The usefulness has to do with markets and the sense of where the economy is going. If there is no revision to prior months, a gain in the current month of 100K would cause the bond market to rally and the stock market to sink (as on Friday). Implication of such a low number being economic weakness. If however all else is the same, but the prior month is revised up by 300K, the reaction of the markets would be just the opposite. Markets always look at the overall impact of the new data including revisions, benchmarking against the prior data point of what was known 30 days ago.

As for Say’s Law, I am supply-side as well. Everything possible policy-wise should be done to enhance the supply of goods and services. But demand matters equally, that is, aggregate demand is important. Aggregate demand was augmented by credit over the past few decades. That’s why the economy grew faster than income gains. The reverse is happening now and it bodes very poor GDP growth going forward (max annual rate of around 2%). The economy would have collapsed in late-2008 without TARP. TARP prevented a bank run and permitted the flow of credit to be greater than otherwise. Credit essentially is a component of aggregate demand (though not as the textbooks, which don’t capture true reality, define it). Even the otherwise abominable fiscal stimulus package was salubrious to aggregate demand for the short-run of perhaps the first couple years. Now it is payback time. Small businesses say poor sales are their biggest problem. They are surely willing to supply the product, but the demand isn’t there. This is not to say that if the anti-business sentiment were lifted businesses would not start new projects they are currently holding off on because of the bad sentiment and uncertainty. They would borrow (credit), hire (thus add to aggregate income), and sales for other firms would improve. Is this supply-side or demand-side? Well it is both. But think hard. Could it have happened without the flow of new credit augmenting the income/sales revenue stream? No, other than in the trivial case of businesses having all the cash in the bank they need to start projects whenever they want to start them. But this is not the real world which is always credit constrained.

Bejamin, the US Federal Reserve will not embark on QE until austerity is tested in California -- that will take at least another year or so -- watch for double-digit percentage California spending cuts, or double-digit percentage California tax increases -- either course of action will test California's mettle fpr austerity...

Hard to say on the Fed. I hold out hope they will rev their engines after a Romney victory. If they tighten after Romney wins, look for the right-wing to talk about revamping the Fed and putting it into the Treasury Department.

It may be that QE will have to become a regular tool in monetary policy.

Benjamin, time will tell, but California will come before additional quantitative easing -- neither Republicans nor Democrats in Washington have any desire to tackle California's deficit issues -- California is essentially, on her own -- the US Fed will not allow quantiative easing to be used to "bailout states," either directly or indirectly...

Somebody needs to be warned of this before people start going bonkers in July and August ...

Both Ford and Chrysler, so far, have announced they will suspend some of the usual early July shutdowns for model-year changes due to increased demand and need to crank out more cars. This happened last year and 2010 also.

What this means is ... initial jobless claims will take a dive in early July ... and then spike up in late July as a counter-reaction in the seasonal adjustments.

Since this will be the 3rd year in a row of this, hopefully the Labor Dept's seasonal adjustments will have incorporated this new phenomenon into their algorithm, but I suspect that will only be partially the case.

Benjamin, I enjoy your comments for the most part, but I think you show your prejudice with your wongful accusations about G. Bush Jr. Don't get me wrong, not a big fan of his, but there was no "Great Bush J. Recession and Financial Collapse."

The fact is that GDP grew, unemployment went down, the deficit shrank, and the Federal government enjoyed the largest tax receipts for an extenced period, in the history of the nation.

The financial collapse happened in his final year and was due to bad policy and a lack of Congressional regulatory oversight. Or some would say, outright corruption.

I see that, once again, he has been horribly over-optimistic: this time with the supposed reversion to any kind of a norm in the US Treasuries to equities correllation. You noted, Scott, how there appeared to be the beginning of a correction about six weeks or two months ago ... perhaps you'd care to note that following that blip the yield on Treasuries has come crashing down to equal or possibly surpass its lowpoing of last December ?!

Sometimes these mean reversions just don't go according to plan, do they ? Sometimes there is a fundamental shift that effectively breaks the correlation ... investors are happy to buy US equities but they are equally happy to keep the rest of the money in the "safe haven" of treasuries, earning effectively nothing or less than nothing after inflation.

It's all about timing, Scott, when it comes to investing. And once again your timing has been woefully off. Damn that stuck-record of Pollyanna optimism, even if it is "relative" optimism as you keep saying.

Bush jr. like all GOP presidents since Eisenhower, ran huge deficits, even when the GOP controlled both houses of Congress, and the economy was growing. Bush (Sr. or Jr.) never even submitted a balanced budget.

Bush committed us to not one but two lengthy and extremely expensive wars.

The financial system collapsed while he was President---and after he had nearly eight years on the watch.

Bush jr. has to take responsibility for that collapse. If he does not, then we cannot hold any US President responsible for anything.

If the economy tanks now, why blame Obama? If Vietnam was a mess, why blame LBJ? If inflation was horrible in the 1980s, why blame Carter, Or Reagan?

We had great times in the 1990s (and balanced budgets) but Clinton had nothing to do with it. He submitted balanced budgets to Congress, and worked with leaders there to get them passed, but obviously he was not responsible?

Look, a President has to take responsibility for what happens on his watch. The Bush jr. Presidency was a train wreck into a sewage treatment plant.

Obama may be little better, and I am sick of the anti-business rhetoric of the D-Party.

Ive "swung at the ball" which is precisely why im unhappy with the "umpire" who is in fact not an umpire. Im just venting because i put too much credence on his enthusiastic words. Have done so before and come unstuck. As he told me then, dont trust anything too much if its "free" advice. And i might add, never trust an economist to help you trade.

Having worked for many years as an economic consultant and forecaster, I learned long ago that being a forecaster is a miserable job. If your forecasts are correct and your clients make money by betting on them, then your clients are geniuses for having hired the right forecaster and having made the right decision. But if your forecasts are wrong and your clients lose money by betting on them, then you are a worthless pile of sh*t. It's a no-win situation, and that is why I feel free to make forecasts here because I am not charging for them.

I use this blog as good discipline for my own investment decisions, which I know will not always be correct. I can never expect to be right about everything, and so I never put all my chips on any one forecast. Deciding how much risk to take on any one bet is an art, and it depends very much on one's particular situation. Successful investors will draw on my knowledge and that of many others and come to their own conclusions about how and how much to bet on the future.

Of course we can disagree. Obviously you don't like GWB. That's fine, that's your right. I'm not that fond of his presidency either, even though I think he is a decent man. But you mix facts and blend different situations together in order to come up with your reasons for disliking him.

For one the budget deficit decreased down to close to 200mil before the financial crisis. He did not run expanding deficits. He inherited an almost zero GDP economy from Clnton and managed to expand GDP by 2 trillion durng his presidency. The wars in Iraq and Afgan. did not break the economy and whether a supporter of those wars or not is an issue of policy and/or morality not a reason for economic failure.

I cannot for the life of me see how you can blame GWB for the financial collapse. It was a problem that started many years before with the Community Reinvestment Act and bullied through by Congress (Frank and Dodd) and Clinton. Bush, representing the executive branch warned on several occassions to Congress about the lack of oversight of Fannie and Freddie.

The GWB administration is guilty of missing some great opportunities to advance conservative causes, That is the failure of his presidency. GWB was a RINO.

Unless i am a masochist, and perhaps I am, i too must value Scott's bloggy musings or I wouldnt keep reading him ! But i feel u are a little disingenuous Scott when u now distance yourself from being a forecaster. At other times u like to show us how u made X predictions and how a nig percentage were on the money. U have a healthy ego and like to state your case in pretty forceful terms. Not exactly a wallflower. Are u a leader or a follower ?

Rob: making a living selling forecasts is what I don't like. Besides, if I were a flawless forecaster I would be a zillionaire and I wouldn't need to go through all the work necessary to make intelligent posts.

Plus, you don't necessarily need good forecasts to make money in the market. My London colleagues taught me the wisdom of "value over view." Sometimes, paying attention to value is much more rewarding than having a forecast or view about what is going to happen, because value can make up for bad forecasts.

But in any event, I do sometimes have very strong beliefs and views about what will happen. Many times I've suffered because my timing was off (I'm usually way too early), and sometimes I've just been careless and lost a lot of money (but I hope to avoid those mistakes in the future).

More often than not, I've found that sticking with what I really believe to be right does eventually pay off. Another colleague once called me a "high conviction investor," and I suppose that is an appropriate description of my investing style. I rarely try to trade the market, as I don't feel I have any special knowledge of all its ups and downs. If I can call the long term trend and stick with it through thick and then, then I end up being rewarded.

Fantastic reply Scott ! I may have my "issues" with you now and again but I really appreciate your responsiveness and effort to communicate where you're coming from. Keep up the good work and I'll keep trying to be less of a trader !!